1. Chapter Two
The Impact of Government Policy and Regulation on the Financial-Services Industry
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2. 2-2
Key Topics
The Principal Reasons for Banking and Financial- Services Regulation
Major Financial-Services Regulators and Laws
The Riegle-Neal and Gramm-Leach-Bliley (GLB) Acts
The Check 21, FACT, Patriot, Sarbanes-Oxley, Bankruptcy Abuse, Federal Deposit Insurance Reform, and Financial-Services Regulatory Relief Acts
Emergency Economic Stabilization Act and the Global Credit Crisis
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3. Key Topics (continued)
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Key Topics (continued)
FINREG is passed into law to avoid severe disruption in the financial system and deal with systemic rick
Some Key Regulatory Issues Left Unresolved
The Central Banking System
Organization and Structure of the Federal Reserve System and Leading Central Banks of Europe and Asia
Financial-Services Industry Impact of Central Bank Policy Tools
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4. 2-4
Introduction
This chapter is devoted to a study of the complex regulatory environment that governments around the world have created for financial-service firms in an effort to:
Safeguard the public’s savings
Bring stability to the financial system
Prevent abuse of financial-service customers
Financial institutions must contend with some of the heaviest and most comprehensive rules applied to any industry
Regulation is an ugly word to many people
Burdensome
Costly
Damaging to innovation and efficiency
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5. Banking Regulation Why are banks closely regulated?
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Banking Regulation
Why are banks closely regulated?
Banks are among the leading repositories of the public’s savings
Banks are closely watched because of their power to create money in the form of readily spendable deposits by making loans and investments
Banks have a long history of involvement with federal, state, and local governments
In the United States, banks are regulated through a dual banking system
Both federal and state authorities have significant regulatory powers
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6. 2-6
TABLE 2–1 Banking’s Principal Regulatory Agencies and Their Responsibilities
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7. Banking Regulation (continued)
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Banking Regulation (continued)
One of the earliest theories about regulation contends that firms in regulated industries actually seek out regulation
It brings benefits in the form of monopolistic rents because regulations often block entry into the regulated industry
A more recent theory argues that regulations can increase customer confidence, which may create greater customer loyalty toward regulated firms
There is an ongoing struggle between regulated firms and the regulators
Regulatory dialectic
Financial-service managers will search to find ways around new rules in order to reduce costs and allow innovation to occur
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8. Major Banking Laws – Where and When the Rules Originated
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Major Banking Laws – Where and When the Rules Originated
National Currency and Bank Acts (1863–64)
The first major federal government laws in U.S. banking were the National Currency and Bank Acts, passed during the Civil War
These laws set up a system for chartering new national banks through a newly created bureau inside the U.S. Treasury Department, the Office of the Comptroller of the Currency (OCC)
The Comptroller not only assesses the need for and charters new national banks but also regularly examines those institutions
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9. Major Banking Laws – Where and When the Rules Originated (continued)
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Major Banking Laws – Where and When the Rules Originated (continued)
The Federal Reserve Act (1913)
A series of financial panics in the late 19th and early 20th centuries led to the creation of the Federal Reserve System (the Fed)
The Fed’s principal roles are to serve as a lender of last resort and to help stabilize the financial markets and the economy
Their most important job today is to control money and credit conditions to promote economic stability
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10. Major Banking Laws – Where and When the Rules Originated (continued)
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Major Banking Laws – Where and When the Rules Originated (continued)
The Banking Act of 1933 (Glass-Steagall)
The Glass-Steagall Act defined the boundaries of commercial banking by providing constraints that were effective for more than 60 years
This legislation separated commercial banking from investment banking and insurance
The Federal Deposit Insurance Corporation (FDIC) was created to guarantee the public’s deposits up to a stipulated maximum amount in order to enhance public confidence in the banking system
Initially $2,500 and today it is up to $250,000
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11. Major Banking Laws – Where and When the Rules Originated (continued)
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Major Banking Laws – Where and When the Rules Originated (continued)
The FDIC Improvement Act (1991)
The FDIC was the object of criticism during the 1980s and 1990s
This legislation permitted the FDIC to borrow from the Treasury to remain solvent, called for risk-based insurance premiums, and defined the actions to be taken when depository institutions did not meet capital requirements
Prior to 1993, the FDIC imposed fixed insurance premiums on all deposits eligible for insurance coverage, regardless of the riskiness of an individual depository institution’s balance sheet
This fixed-fee system led to a moral hazard problem
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12. Major Banking Laws – Where and When the Rules Originated (continued)
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Major Banking Laws – Where and When the Rules Originated (continued)
Social Responsibility Laws
Consumer Credit Protection Act (known as Truth in Lending)
Required that lenders spell out the customer’s rights and responsibilities under a loan agreement
Dodd-Frank Regulatory Reform bill
Emphasized providing consumers with more complete and understandable language to convey service prices and avoid misleading information
Equal Credit Opportunity Act
Individuals and families could not be denied a loan merely because of their age, sex, race, national origin, or religious affiliation, or because they were recipients of public welfare
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13. Major Banking Laws – Where and When the Rules Originated (continued)
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Major Banking Laws – Where and When the Rules Originated (continued)
Social Responsibility Laws
Community Reinvestment Act
Prohibits U.S. banks from discriminating against customers residing within their trade territories merely on the basis of the neighborhood in which they lived
Competitive Equality in Banking Act and the Truth in Savings Act
Require banks to more fully disclose their service policies and the true rates of return offered on the public’s savings and the fees associated with credit services
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14. TABLE 2–2 Regulators of U.S. Insured Banks
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TABLE 2–2 Regulators of U.S. Insured Banks
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15. Major Banking Laws – Where and When the Rules Originated (continued)
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Major Banking Laws – Where and When the Rules Originated (continued)
The Riegle-Neal Interstate Banking Law (1994)
Repealed previous provisions that prevented full-service interstate banking nationwide
Major provisions of the Riegle-Neal Act included:
Adequately capitalized and managed holding companies can acquire banks anywhere in the United States
Interstate holding companies may consolidate their affiliated banks acquired across state lines into full-service branch offices
No single banking company can control more than 10 percent of nationwide deposits or more than 30 percent of deposits in a single state (unless a state waives this latter restriction)
For the first time in U.S. history, American banks could accept deposits and follow their customers across state lines
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16. Major Banking Laws – Where and When the Rules Originated (continued)
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Major Banking Laws – Where and When the Rules Originated (continued)
The Financial Services Modernization Act (The Gramm-Leach-Bliley Act (1999))
One of the most important U.S. banking statutes signed into law
Overturned long-standing provisions of the Glass-Steagall Act and the Bank Holding Company Act
Permitted banking companies to affiliate with insurance and securities firms under common ownership
Securities and insurance companies could form financial holding companies that control one or more banks
Banks were permitted to sell insurance and security services, provided they conform to state and federal rules
This law’s purpose was to allow qualified U.S. financial-service companies to diversify their service offerings and reduce their overall business risk exposure
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17. Major Banking Laws – Where and When the Rules Originated (continued)
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Major Banking Laws – Where and When the Rules Originated (continued)
The USA Patriot Act
Made a series of amendments to the Bank Secrecy Act
Passed originally in 1970 to combat money laundering
Requires that financial-service providers establish the identity of customers opening new accounts or holding accounts whose terms are changed
Usually accomplished by asking for a driver’s license or other acceptable picture ID and obtaining the social security number of the customer
Service providers are required to check the customer’s ID against a government-supplied list of terrorist organizations and report any suspicious activity in a customer’s account
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18. 2-18
The 21st Century Ushers in an Array of New Laws and Regulations – FINREG, The Basel Agreement, and Other Rules Around the Globe
The FACT Act of 2003
The Check Clearing for the 21st Century Act (Check 21 Act)
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
The Federal Deposit Insurance Reform Act of 2005
The Emergency Economic Stabilization Act of 2008
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009 (FINREG)
Basel I and II, and Basel III
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19. 2-19
The 21st Century Ushers in an Array of New Laws and Regulations – FINREG, The Basel Agreement, and Other Rules Around the Globe (continued)
Unresolved Regulatory Issues
What should we do about the regulatory safety net set up to protect small depositors from loss, usually through government-sponsored deposit insurance?
Can we train regulators to be as good as they need to be in a more complex financial marketplace?
With the financial-services industry consolidating and converging into fewer, but bigger, firms, can we get by with fewer regulators?
Can we simplify the current regulatory structure and bring greater efficiency to the task?
As financial firms reach their arms around the globe, what nation or nations should regulate their activities?
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